Delhi High Court stays ₹1,140 crore angel tax demand against Oyo

The Delhi High Court stays a ₹1,140 crore angel tax demand against OYO's parent company Oravel Stays for the assessment year 2020-21 under Section 56(2)(viib) of the Income Tax Act

The Delhi High Court on Friday stayed a ₹1,140 crore angel tax demand raised by the Income Tax department from hospitality and hotel aggregator Oyo’s parent company Oravel Stays Private Limited for the assessment year 2020-21.

 

The tax demand was issued under Section 56(2) (viib) of the Income Tax Act, commonly known as the “angel tax” provision, which applies when unlisted companies issue shares at a value exceeding their “fair” market price.

 

While the angel tax provision was dropped during the last budget, legacy cases continue.

 

This section seeks to tax the premium received by a closely held company on the issue of shares that exceeds the fair market value (FMV) of such shares, treating the excess premium as “income from other sources.”

 

The tax department had argued that investments made by Oravel into its Indian subsidiary were at a premium and therefore taxable.

 

Oyo challenged this, saying that the funds infused by the holding company into its subsidiary were capital in nature, not income, and therefore should not attract tax under the angel tax provisions.

 

Oyo had filed an appeal before the Commissioner of Income Tax (Appeals) to challenge the order passed by the assessing officer and also a stay petition before the officer, which was rejected. 

 

Oyo then filed a writ petition before the Delhi High Court, asserting the merits involved in the case.

 

In May 2023, a division bench of the high court had directed the Commissioner of Income Tax (CIT) to accord a personal hearing to Oyo for the stay on the income tax. This was followed by another plea before Delhi High Court for complete stay on tax demand. The division bench had observed that the CIT had not dealt with its application in respect of the order passed by the Assessing Officer (AO) under Section 220(6) of the Income Tax Act, 1961.

 

The petitioner, Oyo, had challenged the order denying the stay on the recovery of the complete tax demand, and asked the department not to treat Oyo as an assessee in default under Section 220(6) of the Income-tax Act, 1961, for the entire outstanding demand of ₹11,39,93,05,320 until the Commissioner of Income-tax (Appeals) decided the appeal.

 

The HC had also directed the CIT to dispose of the application at the earliest possible time, though not later than four weeks. The CIT will accord a personal hearing to the authorised representative of the Oyo and also allow the filing of written submissions.

 

“In case an order is passed by the CIT that is adverse to the interests of the petitioner, the order of the CIT will not be given effect for a period of two weeks from the date when the order is received by the petitioner,” the court had said.

 

Commenting on the order, Amit Maheshwari, tax partner at law firm AKM Global, said, “While the Finance Act, 2024 has completely abolished the angel tax provision under Section 56(2) (viib), legacy cases continue to be litigated at various forums. The quantum of tax demand in such cases is often substantial, placing considerable financial strain on companies asked to pay upfront or secure stay orders. This stay order is thus a significant relief for Oyo. It also sends a broader message on the judicial sensitivity toward the hardships faced by startups and growth-stage companies as a result of aggressive valuation-related tax interpretations.”